Making Acquisitions

Work: Capturing Value

After the Deal

Fourth in a Series of Viewpoints on Alliances

 1999 BoozAllen & Hamilton Inc.

Making Acquisitions Work:

Capturing Value After the Deal
by John R. Harbison
Albert J. Viscio
Amy T. Asin

ergers and acquisitions have swept through

nearly every industry and have become an
essential element of corporate strategy.

The value of mergers and acquisitions announced worldwide in 1998 pushed the $2.5 trillion mark, up over 50
percent from the previous year. Yet fewer than half of
these mergers succeed. Why? More, importantly, is it
possible to improve the odds of success?

Our research shows that

successful acquirers improve the
odds of success to 70 percent.
As a result, they achieve dramatically superior results in terms of
profitability and growth. The
research points to the fact that more
mergers fail due to inadequacies
in post-merger integration rather
than to any fundamental failure of
strategic concept. Until now, each
corporation was left to its own
devices to develop best practices.
However, BoozAllen & Hamilton
has recently completed a groundbreaking detailed study of 34
companies active in acquisitions;
our objective was to distill best
practices.
Exhibit1 shows the dramatic
difference in growth achieved by
successful companies versus
unsuccessful companies. These
differences show that experience
surely pays. But we do not stop

with describing outcomes such as

this one.
We have sifted through differences in integration practices
across more than 100 dimensions
for successful and unsuccessful
companies, thereby surfacing the
unique differences in best practices that are driving dramatically
different results.
In this Viewpoint, the
fourth in a series on corporate
alliances, we explore in depth
the challenges and fundamental
principles of success inherent
in both the mechanics of postmerger integration and meeting
the strategic leadership challenge.
In addition to our research,
our ideas are supported by
experience working with
clients in a full range of industries
across the broad spectrum of
post-merger integration issues.
In a recent Business Week cover

story, BoozAllen & Hamilton

was involved in three of five
successful mergers cited and
none of the 20 failures. In many
engagements, joint client Booz
Allen & Hamilton teams have
significantly exceeded, and in
some cases doubled, pre-merger
expectations of value capture.
We present a proven transformation framework, which we
have applied to post-merger
integration that can guide companies in making successful
post-merger integration a core
competency.

Exhibit 1
Role of Acquisitions in Growth

Annual Percentage Growth

25

40%

26%

24%

20

16%
15

12%
10

35

High-Success
Companies

34%

Low-Success
Companies

30
25

22%

20
15
10
5
0

Revenue

Profit

Source: BA&H Survey on Making Acquisitions Work

Percentage of Revenue from Acquisitions

30%

Level of Acquisition Success

Background

ergers and acquisitions

are a popular way
to grow and fill capability gaps because they can be
integrated relatively quickly. The
race for growth and competitive
advantage appears now to be
a race to see which firms can
add capabilities or access new
markets faster, not only by
building internally a process
often too slow for competitive
marketsbut by creating new
external relationships. In some
industries, in fact, the capability
to accomplish successful mergers
and acquisitions itself has become
a core competency and a source
of competitive advantage.
The banking industry,
for example, has seen more than
2,000 mergers in the last five
years as firms scramble to
become one of the handful of
national franchises predicted
to dominate by 2005. The ten
largest banks now account for
half of all commercial banking
assets in the United States, and
estimates suggest that by the turn
of the century they will account
for almost 70 percent of the total
after further consolidation.1

Furthermore, as the number of

attractive acquisition candidates
shrinks, prices will escalate,
forcing the acquirer to find more
value in the target company.
Under such conditions, integrating
mergers and acquisitions quickly
and effectively becomes not only
a source of expanded capabilities,
but a source of survival.
Putting pen to paper and
signing on the dotted line is one
thing. Post-merger integration
(PMI) bringing the companies
together successfully after the
deal and using what has been
acquired to deliver maximum
valueis the real challenge.
Unfortunately, the success rate in
PMI has been alarmingly low by
most estimates only one-third
to one-half prove successful.
The large number of welldocumented failures Quaker
Oats and Snapple, Wells Fargo
and First Interstate, Novell and
WordPerfect, to name a few
stand out in everyones mind, as
do the notable successes First
Unions, GE Capitals and Cisco
Systems abilities to integrate
multiple acquisitions, for example.
The burning question is: What
do the successful companies
know about making mergers
and acquisitions work that
others have yet to learn?

In cracking the code, the

successful companies address
what BoozAllen & Hamilton
characterizes as two critical
challenges in a merger or acquisition. The first is a mastery of
the mechanics of integration
being able to integrate the two
companies in order to achieve
the stated merger objectives
by planning in great detail from
the outset, identifying sources of
value and how to capture them,
managing the inevitable challenges of cultural change, and
ensuring expert leadership. The
second is the companys ability
to meet the strategic leadership
challenge of post-merger integration being able to identify,
enhance, and leverage the unique
capabilities of the new entity to
maximize profit and growth
by creating a new vision for the
new company to lead its industry
or compete in a new way going
forward. Both elements are necessary for success; mastering the
mechanics, while necessary, is not
sufficient for long-term success.

Mergers and Acquisitions, May/June 1998

The Survey An Antidote

to the Anecdotes

uch of the existing

literature on mergers
and acquisitions
seems more anecdotal than analytical. Most books and articles
focus on explaining what not to
do, instead of presenting hard
evidence of what actually works.
BoozAllen has broken
through this noise and clutter.
We recently conducted a study
of 34 major companies worldwide active in mergers and
acquisitions. They came from
diverse industries including
financial services, telecommunications, electronics, health care,
real estate, chemicals, pharmaceuticals, and others. The trans-

action size of the companies

studied ranged from less than
$500 million to more than $17
billion, and the study covered
different levels of success as
reported by the participants.
Additionally, we have collected
best practices from our 50 most
recent major engagements.
The goal of this research
was to find out how these
companies address the challenges
of making mergers and acquisitions work and to isolate the
approaches and specific tactics
used in both successful and
unsuccessful ventures.
According to the participants, their depth of past experience in mergers and acquisitions
was highly linked to future success. On average, the firms that
defined themselves as successful
had been through 20 deals.

In contrast, the firms that were

considered unsuccessful had
completed only about an average
of eight deals.
What kind of merger
objectives are most likely to
lead to success? Exhibit 2 shows
that strengthening the current
business is more likely to lead to
success than diversification and
expanding into related products
and markets.
And what causes deals
to fail? Overestimating value,
paying excessive premiums, and
inadequate integration planning
and execution (Exhibit 3).
In fact, the odds of success
are much greater when the objectives of the merger allow for the
integration to be aggressive and
for full integration to occur
(Exhibit 4).

Exhibit 2
Forced Ranking of Objectives

Lead/respond to
industry restructuring

Objectives to
Strengthen
Current Business

Improve position
in existing business
Expand into
related markets
Diversify the
business portfolio
Learn about new
(but potentially related)
businesses

High-Success
Companies

Expand into
related products

Low-Success
Companies
Least Important

Source: BA&H Survey on Making Acquisitions Work

Most Important

Best Practices Unlocking

the Value

y sifting through the

differences in how successful and unsuccessful
companies approach integration,
we have surfaced a framework
of over 60 best practice elements
(Exhibit 5) that statistically
explain why the successful
companies succeed.
The top ten of these best
practices, based on the biggest
spread between high and
low success companies, are (in
descending order of criticality):
1) Appoint strong executive to
clearly lead the integration
process

Exhibit 3
Reasons for Failure

Integration planning
inadequate

Implementation
failed
0

50%

60
40
20
0
Absorb
Value source
well understood
Straightforward
action plan

Assimilate
Value from
creating
something new

Autonomous
Value from learning
their business
Success depends on
letting them manage

50%
40
30
20
10
0
Absorb

10) Get task forces (with people

from both companies) interacting as soon as possible

40

80

Percent Average Annual Profit Growth

9) Adopt best practices in

key functions from either
company or external source

30

100%

6) Build a robust plan detailing

integration activities

8) Ensure senior management

involvement in integration
activities

20

Exhibit 4
Integration Approaches

5) Move quickly with regard

to personnel changes

7) Emphasize the transfer of

critical capabilities to capture value

10

Source: BA&H Survey on Making Acquisitions Work

Success Rate

4) Set out credible milestones

and maintain pressure for
progress

Low-Success
Companies

Premium
excessive

2) Compress change duration

by taking bold strokes early
3) Provide for real incentives
to reach targets

High-Success
Companies

Synergy
overestimated

Assimilate

Autonomous

Source: BA&H Survey on Making Acquisitions Work

Exhibit 5
Best Practices of Successful Companies
BEST PRACTICE LEVELS
POST-MERGER INTEGRATION ACTIVITIES

LEVEL 1

ELEMENTS

Strategy & Objectives

Quick insertion of
new leadership team

Value Capture

Strong executive to
lead integration

LEVEL 5

Structure
Senior management
responsibility

Leadership
Actions
Etc.

CURRENT
BEST
PRACTICE

WIDESPREAD PRACTICES

ELEMENT

Shared
Strategy
Formulation
Process

Level 1
Strategy
formed by
acquirer with
little input or
interaction
with target

Level 2
Strategy
formed
by acquirer
with some
input or
interaction
with target

Level 3

Target included
in formulation
process but
acquirer
dominates

WORLD
BEST
PRACTICE

Level 4

Level 5

Target included
but starting
point not a
clean sheet

Cooperative
strategy
formulation
process that
uses a clean
sheet approach
to the new
organization

IMPORTANCE
TO BUSINESS
PERFORMANCE

AVERAGE
LEVEL
ACHIEVED

LEVEL
OF BEST
COMPETITORS

Rating: (1 to 5)

Source: BA&H Survey on Making Acquisitions Work

Companies willing to apply

these best practices now have a
tool to enable them to leapfrog
the learning curve and improve
their results. The rest of this
Viewpoint will explore these
and other best practices in
more detail.

Not Just Bolting Together

VAL-ue: A Framework for PMI

ost companies focus

only on the mechanics
of putting the two
companies together. While
important, mechanics are only
part of the story. Managing the
mechanics requires a disciplined
and tested integration program
fire-ready-aim just wont work.
Meeting the strategic leadership
challenge is the steady hand that
puts the pieces together into a
cohesive whole.

n order to achieve the

transformation required
during post-merger integration, BoozAllen applies what
we call the VAL-ue framework
(Exhibit 6) the Vision, Architecture, and Leadership essential
to success in post-merger integration, implemented through
Understanding and careful Execution. In simple terms, these three
elements represent the what, how
and who of both the mechanics
and the strategic leadership.
Companies that successfully
integrate following a merger have
mastered these three core elements
and found the answers to the
most critical questions they face.

All Three or Nothing at All

xhibit 7 shows the likely

outcomes when one or
more of the VAL-ue components are missing or not fully
realized. For example, without
Vision, the new enterprise lacks
focus and direction. Without a
well-structured process for integrationthe right Architecture
chaos reigns throughout the new
enterprise. And without effective
leadership, the required change
does not occur throughout both
companies at all levels.
It doesnt matter where
you start. Failure to address all

three elements of the VAL-ue

framework can actually destroy
value.

Meeting the Strategic

Leadership Challenge

e believe that
what sets apart the
BoozAllen approach
to post-merger integration is the
emphasis on meeting the strategic
leadership challenge. In its simplest terms the strategic leadership
challenge answers the question:
How will the newly consolidated
company compete and thrive

Exhibit 6
The VAL-ue Framework

What: The Vision

How: The Architecture

What is the vision for the new

enterprise?
How will the new enterprise
create value for its customers?
What incremental market presence can be created?

What parts of the business

should be integrated?

What: The Vision

How: The Architecture

At what level in the business

should change occur?
At what pace should the integration proceed?

How will the new enterprise

achieve its objectives? What
new capabilities, products,
markets or other value-added
offering can be provided?

What capabilities should be

migrated, shared, and built
upon?

Who: The Leadership

What operational and overhead

savings can be obtained? What
are the specific cost-savings
targets?

Who: The Leadership

Who leads the post-merger integration process (overall and day to day)?
How is change created and managed? How should the integration be managed?
What are the roles of CEO and key executives?
How is participation between the two companies balanced?
What level of resources should be dedicated overall to the process?
What are the cultural differences and how should they be managed?

PLUS: Understanding and Execution

Exhibit 7
Three Elements Necessary for Change

ELEMENTS PRESENT
Vision

Architecture

Leadership

Outcome
Successful post-merger integration
Change isnt cascaded throughout both companies or to all levels
No focus: New enterprise lacks direction
Chaos: No process for integration
An academic exercise
Bureaucracy
Empty charisma

Source: BA&H Analysis

once the merged entities come

together? In this way, we look at
post-merger integration as creating
opportunity through corporate
transformation. Stakeholders
expect change. Corporations
should exploit this expectation
of change and act with a transformation mindset rather than an
incremental change mindset. A
transformation mindset opens up
the possibilities for a new vision,
new strategy, new business
opportunities, and long-term
sustainable growth. And it all
starts with a vision.

What Does Vision Mean?

Although all three elements
of our VAL-ue framework
(Exhibit 6) come into play in
both mechanics and strategic
leadership, its the V or vision
that separates the winners from
the losers in meeting the strategic leadership challenge. The
vision for a consolidated organization defines its purpose, where
it is heading, and how it intends
to get there. Exhibit 8 graphically
depicts the elements of a clearly
articulated vision. It begins with
the mission of the new organizationsetting tangible goals and
describing the actions required
to reach them.
The vision includes a welldefined set of core values and
beliefsthe basic precepts that
will reinforce the new organiza-

tions culture and purpose. The

vision also identifies the distinct
set of competencies that will
enable the new organization to
deliver the unique value required
to remain competitive as it goes
forward. A clearly articulated
vision also defines the value
the new organizations fundamental purpose that the
company and its people will
create and deliver. And it also
lays out (in concrete terms) the
expectations for what the company will look like and how it
will operate over time the
vision for the architecture we
described earlier.
There are many companies
that enter into a string of
acquisitions, particularly when
an industry is consolidating,
without a real vision for what

they will do once they have

finished the acquisition binge.
Supermarket chains, banks,
insurance companies, and others
have all set out on a path to get
bigger. Companies must realize
they need to start early on to
develop the vision for how they
will compete once they achieve
their attained size.
For example, in supermarketing, many chains are making
acquisitions in order to achieve
more scale. They want the scale
because they believe that they
need it in order to compete with
mass merchants, discounters,
and club stores that are adding
more and more grocery items to
their stores. So, as these supermarkets make acquisitions and
integrate them for the immediate
value, they must also begin to
set the vision for the future.

What will be their basis of competition with the other channels?

What capabilities, such as more
centralization of certain aspects
of merchandising or sophisticated
logistics, will they need? How
can they begin to develop these
capabilities now as they integrate
one acquisition after another?
GUIDING PRINCIPLES:
Strategic Leadership Vision
Know where you are going
overall and the extent to which
this merger helps to fulfill
the vision
Begin to plan for the future
as you integrate today

An Architecture Upon Which

to Build
Once the vision is set,
its time to begin understanding
the architecture for transforming
the company. Presumably the
acquisition itself was pursued
because it fit into some vision of
where the company was headed
and the capabilities it needed to
get there. The acquisition in
question should provide some
of those capabilities. But the
acquisition also provides an
opportunity to reassess. What
capabilities did we acquire that
fit with the vision? Where are we
still in need? What did we get
with the acquisition that we dont
need? What was unexpected that
we can now use? The answers
to these questions will drive the
architecture of the strategic
leadership challenge.

Exhibit 8
Elements of a Vision

Mission
Core Values
and Beliefs

Distinctive Capabilities

Fundamental Purpose

Expectations About the Future Environment

A set of tangible goals and actions

Basic precepts that reinforce culture, values, and purpose

A set of competencies that enables the delivery

of an organizations unique value
A definition of the value that the company
and its employees create and deliver

A common understanding of the future

Source: BA&H Analysis

Exhibit 9
Strategic Leadership Quotient Sample Diagnostic
Rarely
1

WHATS YOUR SLQ?

1

Can everyone in your company clearly explain the meaning of

the corporate vision after the merger (or series of mergers)?

Is there a clear understanding by everyone of what they have

to do in order to realize the companys vision?

Are conflicts resolved in ways that advance overall company goals?

Do people on the front line routinely do the things necessary

to achieve corporate goals/objectives?

Is behavior at all levels consistent with your stated aspirations?

Are the best people in the company working on the most

important priorities?

Does every manager live your companys values?

Does your top management team have the capabilities to

execute the corporate strategy?

Is the quality of leadership evaluated and rewarded at

every level?

10

Is there superior leadership at all levels of the organization?

Always
7

Source: BA&H Strategic Leadership Center

The completed architecture

should lay out a plan for using
the capabilities that exist within
the corporation and capturing
(by building, buying or allying)
the ones that are still needed.

Leadership for the Future

GUIDING PRINCIPLES:
Strategic Leadership
Architecture
Understand what your
capability gaps are
Devise a plan for filling in
the gaps
Develop a plan for using or
removing acquired capabilities
which are not critical to the
original vision
Assess what to do with the
unexpected benefits of the
merger

10

Tackling the strategic

leadership challenge will also
require leaders who are willing
and able to help develop the
vision and move the corporation
in the established direction. At
BoozAllen & Hamilton, we
refer to the companys ability to
do this as the Strategic Leadership
Quotient or SLQ. The SLQ measures whether the company has a
cadre of managers who understand the mission, vision, and
values of the company, and
understand their role in making

it happen. It means that everyone knows the right thing to

do, has the right skills to do the
right thing, and is empowered
and rewarded for doing right.
The mini-diagnostic shown
in Exhibit 9 can help companies
assess whether they have a high
enough SLQ to meet the strategic leadership challenge in postmerger integration.
GUIDING PRINCIPLE:
Strategic Leadership
Leadership
Build your Strategic
Leadership Quotient

Setting the Vision

Mastering the Mechanics

hile we believe
that addressing the
strategic leadership
challenge is the key to real longterm success after a merger, most
companies in the throes of integration are focused on getting
the mechanics right. There is no
shortage of challenges in this
phase of the integration. Many
companies never get past this
phase to address strategic leadership. Heres what we think it
takes to succeed:

The mechanics of postmerger integration develop

directly out of a clear understanding of how the merger fits
into the overall vision for the
new company the strategic
intent of the merger. This then
leads to a set of priorities for
creating the new organizations
unique value.
Successful acquirers in
our study tended to focus more
intently on specific means of
capturing value by developing
an in-depth understanding of
value sources and then pursuing
them relentlessly. They focused
on the critical elements of the

Exhibit 10
Strategic Intent and Value Creation Priorities

STRATEGIC INTENT

VALUE CREATION PRIORITIES

EXAMPLES

Industry consolidation

Apply best practices to acquired assets

Fold back office into acquiring scaleable
infrastructure

In banking, cut costs quickly to maximize the

benefits of the deal and justify the premiums
paid in an increasingly competitive bidding
game

Strengthen current business

Bring complementary capabilities into

businesses

AT&T/TCI AT&T acquired access to TCIs

infrastructure and TCI gained broader
distribution capabilities

Vertical integration

Capture additional value added

Integrate capabilities

Merck/Medco Merck gained a strong distribution arm

Cross-selling

Integrate for commonality

Create new capabilities
Capture scale

Citibank/Travelers intention is to allow for

each company to distribute through the others
channels

Seed a new business

Isolate/maintain/strengthen acquired assets

and capabilities

IBM/Lotus Lotus brought a new business to

IBM. The challenge was for IBM to leverage it
but not destroy it

Diversification

Keep the best of acquired assets and people

Rethink structure

Allied/Signal balanced the defense business

with commercial aerospace

Source: BA&H Analysis

11

12

EXTENT OF INTEGRATION
Low

High

si

ve

Accelerated

Unequal

es

Most of the actual mechanics of post-merger integration

relate to building the right architecture for the new organization the A of the VAL-ue
framework. This requires an
understanding of the capabilities,
people, and infrastructure needed
to achieve the vision. It begins
with knowing what the company
already has, what it needs, and
how it should get there.
The purpose of architecture
in the mechanics phase is to
change the content of the work
people do and help them adapt
to the change. The architecture
puts into place the processes that
institutionalize change and allow
change to filter throughout the
new organization. It includes

Exhibit 11
Extent and Pace of Integration

gr

Mechanics Meets Architecture

Ag

Explicitly identify the critical

sources of expected value

In our study, participants

overwhelmingly confirmed that
proactive, up-front planning
fosters success. Those who had
experienced successful mergers
reported that they had clearly
defined their objectives early on
and had created detailed battle
plans that encompassed all integration activities. While planning
does not necessarily guarantee
success, the odds for failure are
significant without it. According
to our study, fully two-thirds of
the mergers that were characterized as lacking specific implementation plans prior to closing

RELATIVE SIZE
OF COMPANIES

PACE OF
CHANGE

us

Gain agreement on your

strategic intent and let that
guide the vision for the
merger integration

Architecture for Change

the deal were unsuccessful. The

same failure rate was experienced
in those mergers where the risks
and uncertainties of implementation were not explicitly identified
up front.
It is therefore clear that
planning is important, but how
should the plan be shaped?
One of the key decisions will be
to determine the pace of integration. Our study showed that
successful companies were able
to capture value almost 70 percent faster than their unsuccessful
counterparts. Speed, given the
constraints of the merging companies characteristics, is critical.
Exhibit 11 shows that when
companies are of unequal size,
the pace of integration can be
more rapid than when they are
of similar size.

ut
io

GUIDING PRINCIPLES:
Mechanics Vision

both the end gamewhat the

company will look like postintegration and the change
program to achieve that goal.

Ca

business as value sources and

also emphasized the transfer of
critical capabilities to capture
additional value. In other words,
their mechanics stage of integration was guided by a clear
vision of where they were going
and why.
Exhibit 10 outlines examples of how value creation priorities, and therefore the vision for
the mechanics, develop directly
from the strategic intent of the
consolidation.

Equal

Slow
Diverse

Similar
TYPE OF BUSINESS

Source: BA&H Analysis

Exhibit 12
Sample Checklist Items

Agreement to
Legal Closure

First 30 Days

Due diligence plan

Financial
Governance
Legal
Culture
Operational
Synergy
Regulatory
Environmental

Day one
Consolidate financial
reporting and treasury
Transfer corporate center
functions which interact
with public
Begin week-long
communication program
Learn the business

Build vision

Install core integration team

Understand role of synergies

in achieving vision and
paying for the deal

Focus resources on priority

projects

Next 30 Days

Ongoing
Integration

Assess ongoing initiatives

Continue execution

Implement changes where

possible

Build capabilities

Monitor progress against

targets

Merger integration becomes

part of business

Continue communications

Source: BA&H Analysis

The matrix also shows

that the extent of integration
can increase if the companies
are in similar businesses. The
implication is that the most
aggressive merger integration
programs consist of the combination of two similar companies
of different size (i.e., the big
bank swallowing up a little bank
phenomenon) while the most
cautious are mergers of equals
between relatively dissimilar
partners.
Once the pace and extent
of integration are decided, the
next challenge will be to prioritize the vast array of opportunities. We believe that by arraying
the opportunities across the
dimensions of size, risk, and
effort needed for further analysis, it is possible to determine
where to attack first. Typically

the highest value, lowest risk and

easiest to analyze opportunities
should be addressed in the first
wave. Successive waves should
account for those opportunities
that are lower value, need more
time to analyze, and require more
detailed implementation planning
in order to minimize risk.
Developing the plan means
having a clear sense of what needs
to happen when (Exhibit 12).

GUIDING PRINCIPLES:
Mechanics Architecture
for Change
Begin planning early and
create detailed plans
Set the right pace; work with
a sense of urgency
First attack the opportunities
that combine the lowest risk
and highest reward

13

Where do these opportunities lie? What is the architecture

that actually needs to be built?
Developing the architecture
should be based on the overriding
vision and objectives of the
merger and should involve a
relentless approach to identifying
and capturing value. The new
architecture will emerge from
the new entitys sustainable
competitive position and the
sources of value. Achieving
the new architecture will require
integrating and redesigning
critical functions and processes,
redefining key roles, and developing the new organizational
model. These changes will have
a profound impact on the ability
to capture sustainable value
from the acquisition.
The emerging architecture
should be crafted to provide a
sustainable position that allows
for the ongoing capture of value.
Value capture should be viewed
from an integrated approach, to
ensure it fits the strategic intent
and is internally consistent.
In our experience, the
sources and relative impact of
value capture vary considerably
with each merger. However,
some areas where joint clientBoozAllen & Hamilton teams
typically find value include:
Growth-Oriented
New products (individual and
bundled), service offerings,
markets, customer segments,
distribution channels
Enhanced market presence,
market capture

14

Exhibit 13
Procurement Savings from Recent PMI Examples
25%
25%

20%
20

Percentage Savings

Architecture for the

New Company

17%
15

12%
10

4%

4%

5%
3%

Raw
Materials

Components

Other Product
Related

Other

Note: Other Product Related includes items such as packaging, logistics, and marketing supplies
Note: Other includes items such as systems, insurance and office supplies
Source: BA&H Engagement Experience

Example: Sources of Value in Procurement

While the sources of value capture vary in each acquisition, procurement is a likely driver of value in virtually all situations.
Often sourcing benefits can be derived in product-related (e.g.,
paint, raw materials) and non-product related (e.g., insurance,
travel) categories. Sourcing improvements can often be considered in two phases in a PMI environment. The first phase entails
the ability to leverage greater volume purchasing and consolidation of the supply base. Longer-term but more fundamental
improvements are derived from enhanced supplier relationships
(e.g., strategic sourcing) and product redesign/rationalization.
Collectively, our experience has identified 10-25% improvements
in several product and non-product categories (Exhibit 13).

Enhanced product development efficiency (leveraged

R&D, internal best practices)
Combined technologies
or capabilities
Leveraged sales force
Increased capture of the
value chain

Efficiency-Oriented
Integrated supply chain
Leverage procurement volume
(product and non-product)
Production footprint
optimization
Facility optimization

 Vertical integration,
de-integration
Distribution channel
optimization
Sales force optimization
Headquarters consolidation
Support function consolidation
(HR, finance, IT)
Other
Financial value (balance sheet
items, taxes, etc.)
Optimized programs and
policies (e.g., benefits programs)
Rationalization and/or
elimination of special programs,
projects, etc.
Additional alliances or
relationships
Identifying the key sources
of value is only the beginning
of value capture. While there
will be some opportunities that
require little or no redesign,
most opportunities will require
the redesign of key processes
and activities. In general,
there are usually near-term
opportunities in procurement,
selected facilities and support
functions which can provide
savings. However, most revenue,
supply chain, facility redesign
and distribution efforts require
significant redesign. In some
instances, the emerging design
will take the form of one of the
previous companys (e.g., best
practice), while in other instances
the design will be tailored to
meet the new business model,
potentially based on outside
benchmarks.

Value capture must also be

viewed from a capabilities perspective, i.e., the portfolio of
capabilities that the new corporation must have at its disposal
and how it will build or share
these capabilities across the original merging entities. This is
often the single largest driver of
the ability to attack new revenue
opportunities and reflects a critical role of the global core.
Typically, the acquired
company brings capabilities relevant to achieving the overall
vision and therefore, the goal is
to determine their integration. But
often there are overlapping capabilities that need to be rationalized. And in cases where the
acquired company brings capabilities outside the vision, they
either need to be isolated or
sold, or the vision needs to be
expanded (Exhibit 14).

Architecture must also

consider information technology.
It can be a major enabler of
change if e-mail, voicemail, and
intranet technology are integrated
quickly in order to smooth communications between companies.
Value can be achieved through
rationalizing projects and platforms over the long run, a new
information architecture must
fully integrate the two companies
and address strategic goals.
Post-merger integration
also often provides a rich opportunity to make a fundamental
change to organizational design.
Once again, the post-merger
environment creates an opportunity to modify the organization
within the existing structure or
it provides an opportunity to
craft an entirely new structure.
A new organizational model
must be established, which

Exhibit 14
Capability Portfolio Challenges
Company A

Capabilities to Support
Post-Merger Vision

Company B
Shared Capabilities Relevant to Vision
Individual Capabilities Relevant to Vision
Individual Capabilities Not Relevant to Vision
Source: BA&H Analysis

15

allows for flexibility to respond

to change and to fully integrate
the acquisition.
Post-merger integration
permits an organization to reorient focus (e.g., products and geographies), redesign the underlying
structure (e.g., business units), and
alter the delivery of services
(e.g., from embedded to shared).
Percy Barnevik at ABB applied
the 30-30-30-10 rule to the corporate and services organizations.
Thirty percent was parceled out
to the business units, 30 percent
went to a services company,
30 percent was dropped and
10 percent remained in the
corporate center. Business units
must be realigned to reflect the
new portfolio of capabilities and
optimize the likelihood that new
business opportunities can be
pursued. Mergers also present an
opportunity to rethink the governance structure of the organization: What composition should
the board have? What should be
the role of the board? How should
the board processes be structured?
Finally, mergers present a
challenge to retain key personnel
and to release those who are no
longer needed. Policies must be
set and followed regarding issues
such as severance, relocation,
transfers and pay to stay bonuses.
Furthermore, existing compensation and benefit plans must be
integrated. Creative options such
as stock plans and re-employment pools for laid-off workers
can ease the transition. Most
important, these decisions need
to be made as quickly as possible
and communication must be
timely, open, and honest. People
want to know where they stand.

16

GUIDING PRINCIPLES:
Mechanics Architecture
for New Company
Focus on relentless identification and capture of value
(cost, revenue, and other)
Build an organization that
takes advantage of the strengths
of both companies and looks
at outside benchmarks
Address information issues to
both enable change and capture value
Restructure the business in
a way that maximizes value
capture and optimizes the
business for the future
Handle personnel issues swiftly
and according to policy

Mechanics Requires Leadership

The L in the BoozAllen
VAL-ue framework speaks
directly to the need to develop
transition leaders throughout the
new organization and at all levelsthose who can get the company from where it is (once the
deal is finalized) to where it
wants to be (as defined in the
vision.) The most successful
companies determine their new
leadership teams immediately
following the merger agreement
(if not as part of the agreement.)
Personnel decisions should be
made as far down the organization as possible. Ownership and
defining key roles is essential for
running the business as well
as for value capture. Mergers
inherently create an era of
uncertainty which can potentially
hinder the business (e.g., lower

sales during integration) and

even the best personnel may be
unsure of their role in the organization. Announcing these decisions as early as possible is key
to inspiring confidence from all
audiencesinternal and external. In some cases, companies
have faced the trade-off of making the top leadership announcements quickly, rather than taking
the time to make the choices
perfect. As one executive told
us, The impact of hundreds of
thousands of employees and customers waiting around for a
decision would be a lot worse
than not getting it quite right.
The merger integration
process itself should be led by
a strong executive, usually
dedicated to the task, with
performance rewards linked to
the success of the integration.
GE Capital, one of the most successful companies at integrating
mergers, appoints a dedicated
integration manager to each of
its acquisitions.
The integration leader must
also have a team and a plan. The
transition team should actually
be multiple teams, each focused
on a particular area or source of
value. The individual teams
should be coordinated through a
project manager, or if the situation calls, a project management
office. The teams should have
specific targets to reach and
should move to implementing
ideas as soon as possible. In
order to show fairness and
objectivity and to make the best
decisions, data and analysis
should be used to cut through the
politics and anecdotes that sometimes cloud decision making. But

this is not a mandate to form

dozens of teams. Choosing the
highest value opportunities to
attack and setting teams against the
highest priority items are key to
focusing and completing the job.
The composition of the
teams is critical to success. Teams
need the right mix of skills
financial analysis, functional or
business expertise, leadership,
and project management. Also
critical is choosing people senior
enough in the organization who
can command respect and take
action, and also junior enough to
be willing to roll up their sleeves
and devote real time to the project.
Functional managers, who
will be responsible for delivering
results, should also be actively
involved in the process. Key
personnel should be responsible
for identifying and quantifying
the opportunity and then determining the key actions needed to
realize the savings. During
implementation, progress should
be tracked by comparing the
results to milestone and financial scorecards. Finally, successful companies have teams that
are comprised of people from
both organizations who are able
to work well together.
Creating rapid cultural
change appears to be one of the
most important leadership responsibilities and a distinguishing
tactic among those companies
reporting successful mergers.
Ensuring effective leadership
requires that transition leaders in
successful integrations must share
common attitudes and demonstrate consistent behaviors.
Our study showed that the
tactics used in creating and lead-

ing cultural change seem to focus

on having employees from both
companies perform meaningful
tasks together. The successful
companies reported more extensive use than the unsuccessful
participants of tactics such as
ensuring early interaction
between task forces from both
companies, allowing adequate
time to gain mutual understanding, and transferring best practices between the companies.
Furthermore, successful companies explicitly identify cultural
differences through diagnostics
and create a plan to address them.
They attempt to create the best
culture, not necessarily pick one
or the other.
Perhaps one of the most
critical elements of successful
integration is communication.
Successful companies communicate early, often, and openly
about the integration process.
They focus on answering the
questions that their audiences

want answered in an honest way.

This means giving answers to
tough questions and admitting
when decisions have yet to be
made, along with presenting a
time frame for when they will
be made.
Communications must be
tailored to the audience. For
example, employees at different
levels will have more or less
desire to hear about the overall
reason for the merger versus what
detailed effects it will have on
their daily lives. Geographic and
cultural differences must be
considered, especially when
addressing audiences in different
parts of the world. Successful
companies often use a cascading
method where senior managers
present a fairly standard and
broad message to the entire corporation and then individual
managers meet with their
employees to focus more closely
on their concerns.

Exhibit 15
Frequency of Communication

Successful
Mergers

Employees

Unsuccessful
Mergers

Customers

Suppliers

Annually

Weekly

Frequency of Communications

Source: BA&H Survey Preliminary Results

17

Often overlooked is the

need to communicate to a broad
set of audiences. Employees
at both companies have a need
to know about the combination.
Suppliers are anxious about
business being lost or gained.
Customers are eager to know
how their service will change
and what potential new benefits
or problems are on the horizon.
In any event, communications
need to be frequent and targeted
(Exhibit 15).
GUIDING PRINCIPLES:
Mechanics Leadership
Choose the new leadership
quickly
Pick the right people and dedicated resources to be involved
in the integration process
Show fairness and objectivity
by using data to make decisions
and by including people
from both companies in the
decision-making process
Set out credible milestones
and maintain pressure to
progress by providing for real
incentives to reach targets
Keep the focus of the
integration team on value
capture
Address cultural issues
directly with an explicit plan
Communicate clearly, early,
honestly, and often; use a tone
of decisiveness; dont forget
those outside of the two
combining companies

18

Where to Go from Here?

or many companies, the

opportunities for crafting
significant mergers and
acquisitions are a new frontier.
But even many newcomers
recognize that developing the
ability to integrate mergers and
acquisitions on an ongoing basis
is critical to future success.
In both their planning and
execution, successful companies
handle both the mechanics of the
merger and the strategic leadership challenge. They address the
three essential elements of postmerger integration: the what
or the vision of where the new
entity is going; the how or the
architecture necessary to get
there; and the who or the leadership required to sustain forward
movement. All three elements
must be in place; companies that
fail to thoroughly address one or
more doom themselves to far less
than optimal outcomes from the
start. But those who do master
the three elements exponentially
increase their likelihood for
capturing maximum value after
the deal.

About BoozAllen &

Hamiltons Post-Merger
Integration Work

oozAllen & Hamilton

helps clients accomplish
post-merger integration
by capturing more value with
less risk and with the appropriate
tempo. We also use our depth of
strategic experience to prepare
the new company to compete
into the future, creating step
level change within the company
so that it can drive its industry
forward. We help you to master
both the necessary mechanics
and the strategic leadership
challenge.
We bring to this task:
A proven methodology for
post-merger integration built on
deep and broad experience with
clients, and solid research about
what does and does not work in
the post-merger environment
An understanding of client
companies industries, which
helps to provide the context for
change and for critical decisions
A Post-Merger Integration
Team of experts who stand
ready to assist client teams
A team of people who are
easy to work with and sensitive
to the difficult issues involved
in post-merger integration

oozAllen & Hamilton

is a global management
and technology consulting firm, privately owned by its
partners, all of whom are officers
in the firm and actively engaged
in client service. As world markets mature, and competition on
an international scale quickens,
our global perspective on business issues grows increasingly
critical. In more than 90 countries, our team of nearly 9,000
professionals serves the worlds
leading industrial, service, and
government organizations. Each
member of our multinational
team has a single, common goal
to help every client we serve
achieve and maintain success.
Our broad experience in
the worlds major business and
industrial sectors includes aerospace, agriculture, automotive,
banking, basic metals, chemicals,
construction, consumer goods,
defense, electronics, energy,
engineering, entertainment, food
service, health care, heavy industry, high technology, insurance,
media, oil and gas, pharmaceuticals, publishing, railways, retailing, steel, telecommunications,
textiles, tourism, transportation,
and utilities.
With our in-depth understanding of industry issues and
our expertise in strategy, systems,
operations, and technology, we
assist our clients in developing
the capabilities they need to
compete and thrive in the global
marketplace.
We judge the quality of
our work just as our clients do
by the results. Their confidence
in our abilities is reflected in the
fact that more than 85 percent

of the work we do is for clients

we have served before. Since
our founding in 1914, we have
always considered client satisfaction our most important
measure of success.
BoozAllen & Hamilton
also has extensive experience
assisting clients throughout the
process of forming strategic
alliances and acquisitions,
including vision definition, identification of critical capabilities,
screening for partners, evaluating
priority partners, negotiating and
implementing alliances/acquisitions. We work together with
our clients in three ways to help
them improve their performance
in alliances/acquisitions:
Process (Institutionalizing
Capabilities): Assisting clients
to build/improve their underlying
capabilities in identifying, evaluating, negotiating, implementing, and managing acquisitions
and alliances based on our
best practices frameworks and
methodology.
Content (Transactions):
Working together with a client on
a specific alliance or acquisition,
at individual stages in the process
or throughout the process.
Alliance Portfolio Renewal:
Revitalizing a clients portfolio
of existing alliances by involving
the clients current partners in
an effort to improve performance
of those alliances, by tuning
them up and reinvigorating them.
We couple the understanding from our industry practices
with our functional expertise in
alliances and our geographical
footprint to help our clients
achieve superior results in their
alliance efforts.

Other related Viewpoints

in our Alliances series:
1) A Practical Guide to
Alliances: Leapfrogging the
Learning Curve
(1993)
2) Cross-Border Alliances in
the Age of Collaboration
(1997)
An Asian Perspective on
Cross-Border Alliances:
Different Dreams
(1997)
Betting on Stability and
Growth: Strategic Alliances
in Latin America
(1998)
3) Institutionalizing Alliance
Skills: Secrets of Repeatable
Success
(1998)

Related books in The Age

of Collaboration Series by
BoozAllen & Hamilton authors:
1) Smart Alliances: A Practical
Guide to Repeatable Success
by John R. Harbison and
Peter Pekar
(Jossey-Bass, 1998)
2) The Trillion-Dollar Enterprise
by Cyrus Freidheim
(Perseus Books, 1998)
3) Balanced Sourcing:
Cooperation and Competition
in Supplier Relationships
by Timothy M. Laseter
(Jossey-Bass, 1998)

19

John R. Harbison, Vice President

for BoozAllen & Hamilton based
in Los Angeles, specializes in
strategic alliances, acquisitions,
and post-merger integration. He
has recently published the book
Smart Alliances: A Practical
Guide to Repeatable Success.
Albert J. Viscio, Vice President
for BoozAllen & Hamilton based
in San Francisco, specializes in
post-merger integration, corporate organization, and management and strategic leadership. He
has recently published the book
The Centerless Corporation: A
New Model for Transforming
Your Organization for Prosperity
and Growth.
Amy T. Asin, Principal for
BoozAllen & Hamilton based
in San Francisco, specializes in
post-merger integration, corporate organization, and management and strategic leadership.

20

For more information, contact:

John R. Harbison
Vice President
BoozAllen & Hamilton Inc.
5220 Pacific Concourse Drive
Suite 390
Los Angeles, CA 90045
310-348-1900
E-mail: harbison_john@bah.com
Albert J. Viscio
Vice President
BoozAllen & Hamilton Inc.
101 California Street
Suite 3300
San Francisco, CA 94111
415-391-1900
E-mail: viscio_albert@bah.com
Amy T. Asin
Principal
BoozAllen & Hamilton Inc.
101 California Street
Suite 3300
San Francisco, CA 94111
415-391-1900
E-mail: asin_amy@bah.com

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